Excessive Pricing: A Neglected Antitrust Concept?

Antitrust authorities worldwide have actively investigated and penalised dominant enterprises on various types of anti-competitive conduct. However, historically, very few cases have been pursued on the issue of excessive pricing by dominant entities. It is a popular perception that this seemingly unanimous reluctance by competition authorities to initiate cases in this realm of antitrust laws could be attributable to the perceived difficulties in establishing when pricing is truly excessive. While the allegations of excessive pricing have been often brought up in a multitude of jurisdictions, its successful enforcement has been rare given the challenges in determination of the ambit of  “excessive” and against what “benchmark” price should it be compared. This coupled with the paucity of substantial evidence concerning the costs and expenditures incurred in manufacturing/providing the goods/services, and the presence of commercial justifications for charging the excess over and above the costs and a reasonable margin[1] have further contributed to the dormancy of this rather key issue under antitrust laws. This articles briefly examines the concept of excessive pricing, reasons it is fraught with difficulties and the old as well as the recent decisions which have the potential to be a game changer in the domain of “excessive pricing”.

Excessing pricing: Theory and practice

As the name suggests, excessive pricing entails charging of exorbitant prices for goods and services by dominant entities that bear no reasonable relation to the economic value of the goods or service provided, and is above such economic value. It falls within the ambit of abuse of dominant position under the competition laws. In 1978, United Brands case[2] was the first significant decision where the European Court of Justice (ECJ) decided on a claim of excessive pricing and laid out a twofold test to objectively determine such a claim. First, the difference between the costs incurred by the dominant entity and the prices actually charged by it must be in excess; and second, the price under consideration must also be unfair either in itself or when compared to prices of competing products.[3] In more recent times, the United Kingdom (UK) Competition Appeal Tribunal (CAT) in 2001[4] found Napp Pharmaceutical to have abused its dominance by excessively pricing its drug in the community segment as compared to its sale price, of the same drug, in the hospital segment, where it was sold at an excessively low price. This decision was considered to be significant especially in the pharmaceutical space considering that the challenges associated with excessive pricing only intensify in this sector where exorbitant drug prices primarily act as equalisers of massive investments in research and development (R&D), innovations, etc. However, the last two years have seen steady activity in the pharmaceutical sector internationally in the context of excessive pricing (discussed below).

Excessive pricing and pharmaceutical sector: The seesaw

Given the adverse impact of excessive pricing of life-saving drugs on the consumers along with the market perception which presupposes that after the expiry of the drug patent, the market entry of generic competitors will keep the drug prices low and thus, generic drug price need not be regulated, the issue of excessive pricing in the pharmaceutical sector has started to attract vigorous scrutiny of various competition authorities.

After decades of silence, the discussion on excessive pricing has revived with the landmark ruling by the UK Competition and Markets Authority (CMA) in 2016 where it imposed a hefty fine of 90 million pounds on Pfizer, Inc. (Pfizer) and Flynn Pharma Ltd. (Flynn) for abusing their dominant positions and charging excessive price for Pfizer’s phenytoin sodium capsules (Epanutin), an anti-seizure drug. CMA found that both Pfizer and Flynn (exclusive distributors of Epanutin in UK) were dominant in their respective markets of manufacturing and distribution of Epanutin and had substantively exceeded their cost-profit margins by increasing the sale price by 2600%. It was also observed that Epanutin, being an old drug with a stable customer base did not require new research or innovations and given its narrow therapeutic index and clinical background, which warned against switching to substitutes, there were no substantive factors that justified the excessive price.[5]

Similarly, the Italian competition regulator also recently fined Aspen Pharmacare for boosting the price of anti-cancer drugs by over 1300 per cent, which was found to be excessive and unfair on several parameters such as the nature of drugs in question, absence of economic justifications for charging the excess, the historical price pattern, prices of competing products, level of entry barriers, etc.[6] The decisions in Aspen[7] and Pifzer/Flynn[8] cases evidently resulted in what may be termed as a “trickle-down” effect in the global antitrust space triggering other jurisdictions including the European Commission[9] to commence investigation in this (thus far) elusive domain.

Indian jurisprudence

In the Indian context, the charging of excessive/unfair prices by dominant entities is prohibited under the abuse of dominance provisions of the Competition Act, 2002 (the Act), i.e., Section 4 of the Act. The Competition Commission of India (CCI) in its enforcement jurisprudence has recognised the practical difficulty in establishing the scope of excessive pricing.[10] Further, in line with the erstwhile global trend, allegations of excessive pricing have been typically rejected[11] in the past for want of substantial evidence on costs, presence of countervailing factors such as availability of substitutes from competitors and the legitimate reluctance in exceeding its jurisdiction by setting prices of goods/services.

It is also pertinent to note that while the Indian regulator has taken a keen interest in regulating the pharmaceutical sector in both the merger control[12] and enforcement[13] spheres, there has been an absence of enforcement action by CCI against excessive pricing of drugs in the pharmaceutical space. Very recently, an allegation of unfair pricing of the anti-cancer drug Trastuzumab was rejected in Biocon Ltd. v. F. Hoffmann-La Roche AG[14] on the premise that the initial increase in drug price was attributable to the huge costs incurred in R&D and innovation.

However, in the light of the growing global traction on excessive pricing in the pharmaceutical sector coupled with the enormous size of the of the Indian pharmaceutical industry with the presence of large multi-national pharmaceutical corporations, CCI may soon be confronted with an increased number of investigations into the drug pricing of pharmaceutical companies. While it is likely that CCI may rely upon the tried and tested parameters used in other mature jurisdictions, it is expected that CCI would tailor these parameters to suit the peculiarities of the Indian pharmaceutical sector and simultaneously balance the dual objectives of affordable healthcare and preserving R&D and innovation. Another related aspect in such cases would be for CCI to perhaps exercise caution in order to ensure that it does not exceed its regulatory boundaries and trespass into the domain of the sector specific price regulators.

Anshuman Sakle is a Partner with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at anshuman.sakle@cyrilshroff.com. Anisha Chand is a Principal Associate with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at anisha.chand@cyrilshroff.com.

[1] Deutsche Post AG — Interception of Cross-Border Mail, Commission Decision, (2001), COMP/36.915; Attheraces Ltd. v. British Horse Racing Board, 2005 EWHC 3015 (Ch).

[2] United Brands Co. and United Brands Continental BV v. Commission of the European Communities, 1978 ECR 207.

[3] Ibid.

[4] Napp Pharmaceutical Holdings Ltd. and Subsidiaries v. Director General of Fair Trading, 2002 CAT 1.

[5] Competition and Markets Authority, Unfair pricing in respect of the supply of phenytoin sodium capsules in the UK, Case CE/9742-13, 7-12-2016, available at <https://assets.publishing.service.gov.uk/media/594240cfe5274a5e4e00024e/phenytoin-full-non-confidential-decision.pdf >.

[6] Aspen loses cancer drug appeal and must pay 5 million pounds fine, 14-6-2017, available at <http://www.fin24.com/Companies/Health/aspen-loses-appeal-and-must-pay-52m-fine-in-italy-20170614>.

[7] Ibid.

[8] Flynn Pharma Ltd. v. Competition and Markets Authority, 2017 CAT 1.

[9] European Commission, Press Release, Antitrust: Commission opens formal investigation into Aspen Pharma’s pricing practices for cancer medicines, 15-5-2017, available at <http://europa.eu/rapid/press-release_IP-17-1323_en.htm>. Further, Spain and South Africa have also commenced investigations into the conduct and excessive prices charged by Aspen and other pharmaceutical companies for life-saving drugs.

[10] Kapoor Glass (India) (P) Ltd. v. Schott Glass (India) (P) Ltd., 2012 SCC OnLine CCI 16.

[11] Govt. of India (Deptt. of Agriculture, Coop. & Farmers Welfare) v. Mahyco Monsanto Biotech (India) Ltd., Reference Cases Nos. 2 of 2015 and Case No. 107 of 2015, order dated 10-2-2015; All Odisha Steel Federation v. Odisha Mining Corpn. Ltd., 2013 SCC OnLine CCI 64, HT Media Ltd. v. Super Cassettes Industries Ltd., 2014 SCC OnLine CCI 120.

[12] For instance, Sun Pharmaceutical Industries Ltd. v. Ranbaxy Laboratories Ltd., C-2014/05/170, decided on 5-12-2014; Strides Shasun Ltd. v. Sun Pharmaceutical Industries Ltd., C-2015/10/324, decided on 30-12-2015 and Corona Remedies (P) Ltd. v. GlaxoSmithKline Pharmaceuticals Ltd., C-2017/01/477, decided on 1-3-2017.

[13] For instance, Belgaum District Chemists and Druggists Assn. v. Abbott India Ltd., 2017 SCC OnLine CCI 20; Glenmark Co., In re, 2014 SCC OnLine CCI 134.

[14] 2017 SCC OnLine CCI 21.

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